As boring as dividend stocks may seem, they can unlock enormous wealth over the long term. There’s a popular belief that becoming a millionaire in the stock market requires investing in companies like Apple or Amazon while they’re still in early stage development. After all, even a small investment in both these businesses 20 years ago would be worth a fortune today.
These millionaire-making growth opportunities undoubtedly exist, especially in the current bear market environment with stock prices trading so cheaply. However, identifying which companies will transform into industry titans two decades from now is pretty tricky. It’s like trying to find a needle in a haystack.
Fortunately, there’s an easier approach.
Leveraging the power of dividend stocks
Last May, I received £310.50 in dividends from three different companies in my portfolio – Somero Enterprises, Mastercard, and Alpha FX. In 2021, these same stocks generated only £209.71. In other words, in just 12 months, my passive income stream expanded by 48%!
That’s a pretty impressive growth rate. At least, I think so. And it was driven by two factors. Firstly all three firms increased shareholder dividends as performance continues to thrive despite the ongoing disruptions plaguing the economy. And secondly, I reinvested all the payouts back into these dividend stocks. Assuming this growth rate can continue, my £310.50 would turn me into a millionaire in just 17 years.
Realistically speaking, maintaining a 48% dividend growth rate for nearly two decades is quite unlikely. But as it turns out, I don’t need them to.
Even if these firms only reach an average annualised 10% dividend growth and match the stock market’s average annual share price growth of 10%, my £310.50 would still reach millionaire territory – it would just take 41 years. That’s obviously a long time. But suppose I can spare an additional £310.50 each month from my salary to top up on my dividend stocks? In that case, the time required for compounding to do its magic is cut in half.
Nothing is risk-free
Becoming a millionaire in just 20 years with only a relatively modest amount of capital to work with is an undeniably exciting prospect. And while it’s a strategy I’m personally deploying, I’m not blind to the risks.
Three dividend stocks are obviously not enough to make a diversified income portfolio, regardless of whether they all operate in different industries. It’s important to remember that dividends are optional for companies. They can be cut, suspended, or outright cancelled, even on short notice. And the act of doing so often sends the share price plummeting, potentially wiping out years of passive income growth.
That’s why I’m currently on the prowl to find new dividend stocks capable of generating long-term expendable income. With multiple dividend income sources, the adverse effects of a payout cut from one stock can be significantly mitigated, protecting my portfolio’s progress to reaching seven figures.